Political Economy.doc

Chapter 02 - National Differences in Political Economy

National Differences in Political Economy

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International Business: Competing in the Global Marketplace Sixth Edition Chapter 2

Learning objectives

Understand how the political systems of countries differ.

Understand how the economic systems of countries differ.

Understand how the legal systems of countries differ.

Be able to explain what determines the level of economic development of a nation.

Discuss the macro-political and economic changes taking place worldwide.

Describe how transition economies are moving towards market based systems.

Articulate the implications for management practice of national differences in political economy.

This chapter discusses differences in national political, economic, and legal systems, highlighting the ways in which managers in global settings need to be sensitive to these differences.

Political differences are described along two dimensions: collectivist vs. individualist and democratic vs. totalitarian. Economic systems are explored in terms of market characteristics: market economies, command economies, and mixed economies. Legal systems are discussed in terms of the protections they offer for business: intellectual property, product safety, liability and contracts.

The opening case explores the political and economic situation in Venezuela since Hugo Chavez was elected president in 1998. The closing case describes the challenges facing Indonesia, a vast country populated mainly by Muslims that stretches over 17,000 islands. Indonesia, after decades of corruption and a near dictatorship, now has a newly elected president.

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OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL ECONOMY

Opening Case: Chavez’s Venezuela

Introduction

Political SystemsCollectivism and IndividualismDemocracy and Totalitarianism

Economic SystemsMarket EconomyCommand EconomyMixed Economy

Legal SystemsDifferent Legal Systems Differences in Contract LawProperty Rights and CorruptionThe Protection of Intellectual PropertyProduct Safety and Product Liability

Country Focus: Corruption in Nigeria

Management Focus: Starbucks Wins Key Trademark Case in China

The Determinants of Economic DevelopmentDifferences in Economic Development Broader Conceptions of Development: Amartya SenPolitical Economy and Economic Progress Geography, Education, and Economic Development

States in TransitionThe Spread of Democracy The New World Order and Global TerrorismThe Spread of Market-Based SystemsThe Nature of Economic TransformationDeregulationPrivatizationLegal Systems

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Implications of Changing Political Economy

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Country Focus: Building a Market Economy in IndiaImplications for Managers

BenefitsCostsRisksOverall Attractiveness

Summary

Critical Thinking and Discussion Questions

Closing Case: Indonesia—The Troubled Giant

CLASSROOM DISCUSSION POINT

Ask students to think about the two dimensions used to describe political systems: Collectivist-Individualist and Democratic-Totalitarian. Begin by drawing the following scale on the board:

______________________________________________________Individualist Collectivist

______________________________________________________

Democratic Totalitarian

Then ask students to provide some examples of what might describe a collectivist system, where does Canada’s national healthcare system put it, which countries might be considered democratic, where should China be placed, and so on.

Finally, move to a discussion of how differences in political economy present both opportunities and threats for business. Managers must analyze each national market that they participate in and identify specific ways in which the political economy of that nation could support or threaten the company’s business model.

If there are foreign students in the class or students with foreign experience, you might draw on their observations of differences these dimensions impose on the practice of business.

OPENING CASE: Chavez’s Venezuela

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Summary

The opening case explores the political and economic situation in Venezuela since the election of Hugo Chavez as president in 1998. Chavez, who ran on a platform against corruption and economic mismanagement, faced a country mired in recession. His strategy involved drafting a new constitution that keeps him in power until 2013, and reconfiguring the Supreme Court. As a result, Venezuela is now considered to be only “partly free.” Today, unemployment remains high, and poverty continues to rise, corruption is rampant, and there is a move to privatize certain industries, with the oil industry being a particular target. Discussion of the case can revolve around the following questions:

1. How has the political landscape of Venezuela changed under Chavez?

2. Discuss how Venezuela’s rampant corruption is impeding the country’s economic growth.

3. Imagine the company you work for has operations in Venezuela. How would you react to the changes under Chavez?

LECTURE OUTLINE

This lecture outline follows the Power Point Presentation (PPT) provided along with this instructor’s manual. The PPT slides include additional notes that can be viewed by clicking on “view”, then on “notes”. The following provides a brief overview of each Power Point slide along with teaching tips, and additional perspectives.

Slides 2-3-2-4 Political EconomyThe political, economic, and legal infrastructure of a nation has a major influence on the way managers make decisions. Political systems have two dimensions: the degree of collectivism versus individualism, and the degree of democracy versus totalitarianism. These dimensions are interrelated; systems that emphasize collectivism tend towards totalitarian, while systems that place a high value on individualism tend to be democratic.

However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist.

Slides 2-5-2-10 Collectivism and Individualism

Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. Advocacy of collectivism can be traced to the ancient Greek philosopher Plato. In modern times the collectivist system is largely the domain of nations that have embraced socialism.

Individualism is the direct opposite of collectivism. Its central tenet is that individual economic and political freedoms are the ground rules on which society is based.

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Slides 2-11-2-14 Democracy and Totalitarianism

Democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. Most modern democratic states practice representative democracy in which citizens periodically elect individuals to represent them. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited. (Communist, theocratic, tribal, right wing) Totalitarianism denies its citizens all of the constitutional guarantees asserted by representative democracies.

Slide 2-16 Economic SystemsThere is a connection between political ideology and economic systems. In countries where individual goals are given primacy over collective goals, we are more likely to find free market economic systems. In contrast, in countries where collective goals are given preeminence, the state may have taken control over many enterprises, while markets in such countries are likely to be restricted rather than free.

There are three broad types of economic systems: the market economy, the command economy, and the mixed economy.

Slide 2-17 Market Economy A market economy is an economy in which all productive activities are privately owned, as opposed to being owned by the state. Production is determined by the interaction of supply and demand and signaled to producers through the price system.

Slide 2-18 Command Economy A command economy is an economy in which the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government.

Slide 2-19 Mixed EconomyA mixed economy is an economy in which certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning. India has a mixed economy.

Mixed economies were once very common throughout much of the world, although they are becoming much less so. There was a time not too long ago when Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three.

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Slide 2-21 Legal SystemsLegal systems are the systems of rules or laws that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained.

There are three main types of legal systems – or legal traditions – in use around the world: common law, civil law, and theocratic law. Common law is based on tradition, precedent, and custom. Civil law is based on a very detailed set of laws organized into codes. Theocratic law is based on religious teachings.

Another Perspective: The Encyclopedia of Corporate Governance is a site that contains a broad base of information about international law and the legal systems of the countries of the world. This site is available at {http://www.encycogov.com/B14IntCorpGov.asp}.

Slides 2-23-2-25 Contract LawA contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. Contract law is the body of law that governs contract enforcement.

Since common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code.

When contract disputes arise in international trade, there is always the question of which country’s laws apply. Many countries including the United States have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS). The CIGS establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations.

Slides 2-26-2-29 Property RightsProperty rights refer to a resource over which an individual or business holds a legal title; that is, a resource that they own.

These rights can be violated through private or public action. Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. Public action violations occur when public officials, such as politicians and government bureaucrats, extort income or resources from property holders.

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http://www.encycogov.com/B14IntCorpGov.asp


Another Perspective: The U.S government’s web page on intellectual property rights, {http://usinfo.state.gov/products/pubs/intelprp/}, contains a wealth of information on intellectual property rights including information on international intellectual property rights treaties and protecting trademarks.

Another Perspective: U.S. exports of intellectual property were nearly $27 billion in 1995. Intellectual property imports were just $6.3 billion. Much of the trade in intellectual property was intracorporate trade. More details can be found at {http://pubs.acs.org/hotartcl/chemtech/97/sep/comp.html}.

In the United States the Foreign Corrupt Practices Act makes bribing a foreign government official in order to obtain or maintain business over which that foreign official has authority a violation of United States law, and requires all publicly traded companies to keep audit records.

Slides 2-31-2-32 Intellectual Property RightsIntellectual property is property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula for a new drug. Ownership rights over intellectual property are established through patents, copyrights, and trademarks.

Another Perspective: A summary of U.S. Trademark law, which may be interesting to your students, can be found at {http://www.law.cornell.edu/topics/trademark.html}.

Another Perspective: The World Intellectual Property Organization’s web site contains extensive information on various treaties and agreements between countries regarding the protection of intellectual property. The site is {http://www.wipo.org/treaties/ip/}.

Slide 2-34 Product Safety and LiabilityProduct safety laws set safety standards for products and manufacturing processes. Product liability involves holding a firm and its officers responsible for product safety standards.

Slide 2-35 Determinants of Economic DevelopmentDifferences in economic development across countries are often linked to differences in their political, economic, and legal systems. Economic development can be measured by gross national income per head of population (GNI) (rather than GNP) and purchasing power parity (PPP) which is GNI per capita adjusted for cost of living.

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http://www.wipo.int/portal/index.html.en

http://www.law.cornell.edu/topics/trademark.html

http://pubs.acs.org/hotartcl/chemtech/97/sep/comp.html

http://usinfo.state.gov/products/pubs/intelprp/


Slide 2-37 Broader Conceptions of Development: Amartya Sen The Nobel prize-winning economist Amartya Sen has argued in his theory of social development that development should be assessed less by material output measures such as GNI per capita/GDP per capita and more by the capabilities and opportunities that people enjoy.

Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations.

Slide 2-38 Political Economy and Economic ProgressA country’s economic development is a function of its economic and political systems.

Economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. Innovation and entrepreneurship require strong property rights.. Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal elements or by the state.

There is debate on the kind of political system that best achieves a functioning market economy with strong protection for property rights. People in the West tend to associate a representative democracy with a market economic system, strong property rights protection, and economic progress. Building on this, we tend to argue that democracy is good for growth.

However, some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. Four of the fastest-growing economies of the past 30 years—South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth: undemocratic governments! While it is possible to argue that democracy is not a necessary precondition for a free market economy in which property rights are protected, subsequent economic growth often leads to establishment of a democratic regime

Slide 2-39 Geography, Education, and Economic DevelopmentIn addition to political and economic systems, geography and education are also important determinants of economic development

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Slide2-41 States in TransitionTwo trends are evident: first, during the late 1980s and early 1990s, a wave of democratic revolutions swept the world; second, totalitarian governments collapsed and were replaced by democratically elected governments that were typically more committed to free market capitalism than their predecessors had been.

These changes were most dramatic in Eastern Europe, where the collapse of communism bought an end to the Cold War and led to the breakup of the Soviet Union, but similar changes were occurring throughout the world during the same period. Across much of Asia, Latin America, and Africa there was a marked shift toward greater democracy.

Slides 2-42-2-43 The Spread of DemocracyThere are three reasons for the spread of democracy: First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.

Second, new information and communication technologies have broken down the ability of the state to control access to uncensored information.

Third, the economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

Another Perspective: A number of countries and regions maintain an international “Chamber of Commerce” to disseminate current information about their respective country or regional of the world. These Chambers of Commerce provide a “first stop” when conducting research on the market potential of a particular country or area. An index of Chambers of Commerce is available at {http://www.serraintl.com//morelink2.html#cofc}.

Slide 2-44 The New World Order and Global TerrorismThere is intense speculation about the future shape of global geopolitics.

Many countries may be increasingly difficult places in which to do business, either because of their inherent violent conflict, or because they are part of a civilization that is in conflict with an enterprise’s home country.

Another Perspective: The U.S. State Department produces a series of annual "Country Reports" to acquaint American businesses with other countries. Each report contains nine sections: (1) Key Economic Indicators; (2) General Policy Framework; (3) Exchange Rate Policies; (4) Structural Policies; (5) Debt Management Practices; (6) Significant Barriers to US Exports and Investments; (7) Export Subsidies Policies; (8) Protection of US Intellectual Property; and (9) Worker Rights. Information about obtaining these reports is available through the United States Department. There is also a special section devoted to international business. The site is {http://www.state.gov/travelandbusiness/}.

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http://www.state.gov/travelandbusiness/

http://www.serraintl.com/morelink2.html#cofc


Slides 2-45-2-46 The Spread of Market Based SystemsParalleling the spread of democracy since the 1980s has been the transformation from centrally planned command economies to market-based economies. Slide 2-47 The Nature of Economic TransformationThese changes have involved:Deregulation - removing legal restrictions to the free play of markets, and allowing the establishment and operations of private enterprises. Privatization - transferring the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction. Privatization - a way to unlock gains in economic efficiency by giving new private owners a powerful incentive—the reward of greater profits—to search for increases in productivity, to enter new markets, and to exit losing ones.

Slides 2-48-2-49 Implications of Changing Political Economy Markets that were formerly off-limits to Western business are now open.

China with its 1.2 billion people and India with its population of almost 1 billion are especially important.

However, just as the potential gains are large, so are the risks. Democracy may not thrive in some countries.

Slide 2-50 Managerial Implications Managers need to focus on two broad areas:First, the political, economic, and legal environment of a country influences the attractiveness of that country as a market and/or investment site. The benefits, costs, and risks associated with doing business in a country are a function of that country’s political, economic, and legal systems.

Second, the political, economic, and legal systems of a country can raise important ethical issues that have implications for the practice of international business. Slide 2-51 BenefitsThe long-run benefits of doing business in a country are a function of the size of the market, the present wealth of consumers in that market, and the likely future wealth of consumers.

Slide 2-52 CostsThere are three types of costs involved in international business: political costs, economic costs, and legal costs.

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Slide 2-53 RisksThere are three types of risk involved in international business: political risk, economic risk, and legal risk.

Slide 2-54 Overall AttractivenessThe overall attractiveness of a country as a market and/or investment site, depends on balancing the likely long-term benefits of doing business in that country against the likely costs and risks.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss.

ANSWER 1: In a market economy, private individuals and corporations are allowed to own property and other assets. This right of ownership provides a powerful incentive for people to work hard, introduce new products, develop better advertising campaigns, invent new products, etc., all in the hopes of accumulating additional personal capital and wealth. In turn, the constant search on the part of individuals and corporation to accumulate wealth enriches the entire economy and creates economic growth. In contrast, in a command economy, private individuals and corporations are not allowed to own substantial quantities of property and other assets. The objective of a command economy is for everyone to work for “the good of the society.” Although this sounds like a noble ideal, a system that asks individuals to work for the good of society rather than allowing individuals to build personal wealth does not provide a great incentive for people to invent new products, develop better advertising campaigns, find ways to be more efficient, etc. As a result, command economies typically generate less innovation and are less efficient than market economies.

QUESTION 2: A democratic political system is an essential condition for sustained economic progress. Discuss.

ANSWER 2: Although you can always find examples of totalitarian regimes that have achieved rapid economic growth, it seems fair to say that sustained, decades-long periods of economic growth are quite rare under totalitarianism. There is a widespread belief in the West that democratic principles are more conducive to long-term economic growth than are totalitarian ones. One of the contributing factors is that democratic systems allow for the stable transfer of power through elections, and thus provide political stability, which is an essential prerequisite for rapid economic growth.

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QUESTION 3: What is the relationship between corruption in a country (i.e., bribe- taking by government officials) and economic growth? Is corruption always bad?

ANSWER 3: In the United States we show public contempt for the practice of bribery although evidence suggests that bribery is not uncommon in the United States. When government officials engage in corruption, they subordinate the interest of their country to their personal gain. They also reduce the level of transparency in business interactions. Many nations with rampant bribery appear to be among the most economically underdeveloped, yet the inflexible generalization that corruption is always bad oversimplifies the role of culture and its influence on meaning-giving. There are many cultures that accept the role of bribes far more openly than we do in the United States. That managers are aware that some countries – France, Germany and Japan for example – recognize that bribes play an important role in some parts of the world and allow their corporations to expense bribes (deduct bribes as a legal corporate expense) is important.

QUESTION 4: The Nobel prize-winning economist Amartya Sen argues that the concept of development should be broadened to include more than just economic development. What other factors does Sen think should be included in an assessment of development? How might adoption of Sen’s views influence government policy? Do you think Sen is correct that development is about more than just economic development? Explain.

ANSWER 4: Sen argues that the ultimate goal of economic life is freedom. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not only an economic process, but a political one too, and to succeed requires the democratization of political communities to give citizens a voice. Sen’s philosophy forces us to confront the fact that economic development is but one measure of a country’s overall development. Governments that are influenced by Sen’s philosophy would value greater freedom for their citizens, usually by exchanging economic development in favor of greater individual freedom. Sen is clearly right— a country that is economically prosperous while still limiting or imprisoning its citizens will ultimately wither because it will be stifling the individual entrepreneurship that leads to economic vitality.

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QUESTION 5: You are the CEO of a company that has to choose between making a $100 million investment in Russia or the Czech Republic. Both investments promise the same long-run return, so your choice is driven by risk considerations. Assess the various risks of doing business in each of these nations. Which investment would you favor and why?

ANSWER 5: When assessing the risks of investment, one should consider the political, economic, and legal risks of doing business in both Russia and the Czech Republic. The political risk in Russia is still high but it is undergoing continual governmental changes under Putin’s leadership, and courting foreign investment. Relatively, the Czech Republic is more stable, but it may have less potential. On the economic front, both countries have inflation and high economic turmoil as unproductive factories are still struggling. From the legal perspective, the Czech Republic is making clear progress, while the situation in Russia is unclear. Thus at this time, the risk in Russia would clearly be higher. (For discussion or to modify this question, you might want to substitute other countries into this question depending on current events and the countries with which your students will be most familiar.)

QUESTION 6: Read the Country Focus on India in this chapter and answer the following questions: a. What kind of economic system did India operate during 1947-1990? What kind of system is it moving towards today? What are the impediments to completing this transformation?b. How might widespread public ownership of businesses and extensive government regulations have impacted (i) the efficiency of state and private businesses, and (ii) the rate of new business formation in India during the 1947-1990 time frame? How do you think these factors affected the rate of economic growth in India during this time frame? c. How would privatization, deregulation, and the removal of barriers to foreign direct investment affect the efficiency of business, new business formation, and the rate of economic growth in India during the post-1990 time period? d. India now has pockets of strengths in key high technology industries such as software and pharmaceuticals. Why do you think India is developing strength in these areas? How might success in these industries help to generate growth in other sectors of the Indian economy?e. Given what is now occurring in the Indian economy, do you think that the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why?

ANSWER: a. The economic system that developed in India after 1947 was a mixed economy characterized by a large number of state-owned enterprises, centralized planning, and subsidies. In 1991, India’s government embarked on an ambitious economic reform program. Much of the industrial licensing system was dismantled, and several areas once closed to the private sector were opened. In addition, investment by foreign companies was welcomed, and plans to start privatizing state-owned businesses were announced. India has posted impressive gains since 1991, however there are still impediments to further transformation. Attempts to reduce import tariffs have been stalled by political opposition from employers, employees, and politicians. Moreover, the privatization program has been slowed thanks to actions taken by the Supreme Court. Finally, extreme poverty continues to plague the country.

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b. The mixed economy that developed in India after 1947 was characterized by a large number of state-owned enterprises, centralized planning, and subsidies. This system not only constrained the growth of the private sector, but it also consequently limited the effects of competition that typically promote efficiency and productivity in a free market system. The system even limited the actions of private companies, requiring them to get government approval for routine business activities. Production quotas and high import tariffs also stunted the development of a healthy private sector, as did restrictive labor laws that made it difficult to fire employees. Foreign exchange restrictions, limitations on foreign investment, controls on land use, and managed prices further exacerbated the situation. It would appear that India’s rate of economic growth was negatively affected during this time frame. By 1994, India’s economy was still smaller than Belgium’s despite having a large population. Both GDP and literacy rates were very low, and some 40 percent of the population lived in poverty.

c. In 1991, India’s government embarked on an ambitious economic reform program. So far, the response to the program has been impressive. The economy expanded at an annual rate of about 6.3 percent from 1994 to 2004. Foreign investment is up from $150 million in 1990 to $6 billion in 2005. Certain sectors of the economy including information technology and pharmaceuticals have done particularly well. Still, problems persist. Actions taken by the government continue to limit efficiency gains for private companies and the country’s high rate of poverty is still a major problem.

d. India’s gains in information technology and pharmaceuticals are impressive. The country has emerged as a vibrant global center for software development, and India’s pharmaceutical companies have taken a strong global position by selling low cost generic versions of drugs that have come of patent in the developed world. As these industries continue to prosper, other sectors of the economy should also see the benefit of spillover effects.

e. Foreign investment is up in India. In fact, foreign investment rose from $150 million in 1990 to $6 billion in 2005. However, whether India is an attractive destination for foreign multinationals selling consumer products remains to be seen. Certainly, the large population will serve to attract some companies, but the fact that some 40 percent of the population is living in abject poverty will scare other companies away. Moreover, it is still not easy to run a company in India thanks to laws limiting everything from who can be fired to who can which products.

CLOSING CASE: Indonesia—The Troubled Giant

Summary

The closing case describes the challenges facing Indonesia, a vast country populated mainly by Muslims. For 30 years, President Suharto, a virtual dictator repressed internal dissent and “crony capitalism” was the norm. In 2003, Suharto was forced to resign amid allegations that he had personally profited from a 1990s IMF bailout. Since them, the country now under the rule of a democratically elected president, has seen some economic progress. Still, the country lags behind neighbors like China, Malaysia, and Thailand. Poor infrastructure, massive red tape, and

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corruption have all been blamed for the country’s continued difficulties. A discussion of the case can revolve around the following questions:

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QUESTION 1: What political factors explain Indonesia’s poor economic performance? What economic factors? Are the two related?

ANSWER 1: For 30 years, Indonesia was run under a dictatorship style government where internal dissent was repressed. Today, while a democracy is in place, the country continues to be plagued by corruption and red tape. Foreign capital is fleeing the country, and the infrastructure is in desperate need of improvement. All of these factors have contributed to the nation’s poor economic climate. Most students will probably observe that the Indonesia’s political and economic situations are intertwined, and that to fix one area, changes will have to made to the other.

QUESTION 2: Why do you think foreign firms have been exiting Indonesia in recent years? What are the implications for the country? What is required to reverse this trend? ANSWER 2: Various factors have been blamed for the drop in the stock of foreign investment in Indonesia including the country’s poor infrastructure, corruption, and red tape. Today, foreign investment is down from $24.8 billion in 2001 to just $11.4 billion in 2004. To reverse this trend, significant infrastructure improvements are probably necessary. In addition, a more streamlined process for companies entering the market, and an effort to curb corruption will make the country more attractive to foreign companies.

QUESTION 3: Why is corruption so endemic in Indonesia? What are its consequences?

ANSWER 3: Transparency International ranked Indonesia 137th out of the 158 countries it tracked for corruption in 2005. This dismal situation is due in part to the low salaries paid to government officials, and the extensive red tape that makes it easy for the officials to request bribes. The country’s history of “crony capitalism” has also led to difficulties. In fact, the nation’s attorney general has suggested that Indonesia’s entire legal system is corrupt. The consequences of this situation are evident in the lack of economic growth made by the country and the continued exit of foreign businesses such as Sony from the nation.

QUESTION 4: What are the risks facing foreign firms that do business in Indonesia? What is required to reduce these risks?

ANSWER 4: Many companies might shy away from doing business in Indonesia. Indeed, there has been a dramatic drop in the country’s stock of foreign investment in recent years. Companies doing business in the country must be prepared to deal with extensive red tape, requests for bribes, and a dubious legal system. Some students might suggest that the best way to deal with the situation is to invest in a local company or form a joint venture with a local company. Others may observe that it may be better to join forces with other firms fleeing the country.

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INTEGRATING iGLOBES

There are several iGLOBE video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following:

Title: Experts Discuss Global DemocracyRun Time: 18: 43

Abstract: This video explores President’s George W. Bush’s initiative to spread democracy around the world.

Key Concepts: political systems, democracy, totalitarianism, economic development, representative democracy

Notes: President George W. Bush maintains that spreading democracy to other nations is central to the United States’ goal of defeating its enemies. Bush believes that promoting democracy is as important as promoting new markets for trade. In a recent conversation with the president of Vietnam, a country with one of the world’s most repressive dictatorships, Bush suggested that countries must demonstrate a strong commitment to human rights, freedom, and democracy before the U.S. will deepen relations. He notes that the best way to encourage the creativity and economic potential of a nation is through freedom.

Yet, despite the rhetoric coming from the White House, it appears that the spread of democracy may actually be slowing, and in some countries even reversing. Competing ideologies and systems have gained popularity in some countries. Freedom House, a nonpartisan group that tracks democracy around the world, is concerned about the trend, and the threat it presents to new democracies. The situation is particularly worrisome in the Middle East. Yet, some experts suggest that simply pushing for a spread of democracy may be misguided. Nikolas Gvosdev, editor of National Interest, cautions that one assumption President Bush is making in his quest to spread democracy is that once a nation adopts democracy, it will become pro-American. Gvosdev argues that this may not always occur. He points out for example, that while both France and India are under democratic rule, they frequently disagree with the United States on a range of issues. Gvosdev also notes that some countries are autocratic, yet still support the United States on key issues. Anne Marie Slaughter, of Princeton University, believes the United States may have made a mistake by promoting democracy for democracy sake when in fact, Bush should have been promoting the notion of a popular and accountable government. She points out that the founding fathers of the United States were not focused on democracy, but instead emphasized the achievement of a representative democracy with checks and balances.

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Nikolas Gvosdev notes that the decision in the United States to establish a representative democracy was home-grown. In other words, another country did not push for the change. He believes that shifting to a democracy is a natural process, and that forcing change by linking it to aid or other issues may not be beneficial. In other words, change may occur in some countries because it is a natural progression. It may not occur in other countries, because the basis for change is not present. Gvosdev also points out that the United States is walking a tight rope in some countries like China and Saudi Arabia. On the one hand, the United States is concerned about its short-term interests, and on the other hand, it wants to push its long term goal. Lorne Craner, of the International Republican Institute, feels that the United States can do both—that while its primary goal should be safeguarding the interests of the United States, if it is engaged with other countries, it can also push democracy.

Discussion Questions:

1. George W. Bush has been quite vocal in his push to spread democracy across the globe. Why do you think he has made this issue such a priority? Do you agree with his policy? Why or why not?

2. Consider the notion that a system of democracy makes the world a more secure place. Do you agree with this idea? How well does it hold up in situations like the one that is currently found in the Middle East?

3. Is the United States being hypocritical when it accepts the support of non-democratic governments, yet preaches the need for democracy?

4. Lorne Craner, of the International Republican Institute, believes that the United States cannot export democracy, rather it can only provide assistance to countries that want to build a democracy. Do you agree with him? Why or why not?

INTEGRATING VIDEOS

There are also several longer video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following:

Title 2: Clearing the Air

Summary: Despite the fact that President Bush pulled the U.S. out of the Kyoto agreement in 2001 arguing that the science about global warming is unclear, and stating that he believes that actions to reduce greenhouse gases are unacceptably costly, cities across the nation are joining forces to fight global warming. Seattle is at the forefront of the movement with a goal of meeting the terms of the Kyoto agreement, which called for the U.S. to reduce greenhouse gas emissions 7 percent from 1990 levels by the year 2012. According to Mayor Greg Nickels, the U.S. cannot afford to wait. Already there are suspicious weather patterns that suggest global warming is an issue, and carbon dioxide levels are at an all time high.

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City leaders from 37 states, and from both sides of the aisle, seem to agree with Nickels and have implemented various programs to protect the environment in their own cities. In Laredo, Texas, for example, concern about car and truck emissions at the Mexican border prompted the city to sign on. For its part, Seattle has promoted the building of energy-efficient green buildings, and has converted its city vehicles to biodiesel fuel. City leaders dismiss Bush’s remarks about jobs that could be lost if the country complied with the Kyoto agreement, noting that new job opportunities will present themselves as the effort to curb greenhouse emissions moves forward. There is concern however that cities cannot do it alone, that they need the support of the federal government. However, like National Park Service geologist Jon Riedel, they warn global warming should not be debated, it is happening.

Discussion Questions:

1. President Bush has come under much criticism, from both republicans and democrats, for his decision to take the U.S. out of the Kyoto Agreement. Now mayors from across the country are taking steps to fight global warming despite the actions of the federal government. Who is Bush trying to protect? Why did he really make the decision to opt out of the Kyoto agreement? Can local governments force business to comply with their efforts to meet the terms of the agreement?

2. Suppose a city such as Laredo, Texas wants to implement a program to help curb dangerous fuel emissions. Should the Federal Government sponsor such a program? Why or why not?3. President Bush has expressed concern over the number of jobs that could be lost if the U.S. were to comply with the Kyoto agreement. However, cities leaders have pointed out that new jobs will be created as a result of complying with the agreement. Which side is right? Why?

4. Should the U.S., because of its position in the global economy, be responsible for leading the world in an effort to curb global warming? What message does Bush’s action send to the rest of the world? Do the local efforts to curb global warming affect the way the U.S.’ position of global warming is perceived by the rest of the world?

globalEDGE™ Exercise Questions

Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following exercises:

Exercise 1 The definition of words and political ideas can have different meanings in different contexts worldwide. In fact, the Freedom in the World survey evaluates the state of political rights and civil liberties around the world. Provide a description of this survey and a ranking (in terms of “freedom”) of the leaders and laggards of the world. What factors are taken into consideration in this survey?

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http://globalEDGE.msu.edu/


Exercise 2One way that experts analyze conditions in different emerging markets and cultures in transition is through the use of economic indictors. Market Potential Indicators (MPI) is an indexing study conducted by the Michigan State University Center for International Business Education and Research (MSU-CIBER) to compare emerging markets on a variety of dimensions. Provide a description of the indicators used in the indexing procedure. Which of the indicators would have greater importance for a company that markets laptop computers? Considering the MPI rankings, which developing countries would you advise this company to enter first?

Answers to Exercise Questions

Exercise 1The report can be accessed by search for the team “Freedom in the World” at {http://globaledge.msu.edu/ResourceDesk/}. Using this search, the first link will lead the user to the Freedom House website and to the Freedom in the World report. This resource is found under the globalEDGE category “Research: Multi-Country”. Be sure to check the “Resource Desk only” checkbox of the search function on the globalEDGE website.

Search Phrase: “Freedom in the World”Resource Name: Freedom House SurveysWebsite: {http://www.freedomhouse.org/}globalEDGE Category: “News & Periodicals: Publications”

Exercise 2The report can be accessed by searching for the term “Market Potential Indicators” at {http://globaledge.msu.edu/ResourceDesk/}. Using this search, the link will lead the user to this report. This resource is found under the globalEDGE category “Research: Rankings”. Be sure to check the “Resource Desk only” checkbox of the search function on the globalEDGE website.

Search Phrase: “Market Potential Indicators”Resource Name: MSU-CIBER: Market Potential IndicatorsWebsite: {http://globaledge.msu.edu/resourceDesk/mpi.asp}globalEDGE Category: “Research: Rankings”

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http://globaledge.msu.edu/resourceDesk/mpi.asp

http://globaledge.msu.edu/ibrd/ibrd.asp

http://www.freedomhouse.org/

http://globaledge.msu.edu/ibrd/ibrd.asp

Documents

Political Economy.doc